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IN THE COURT OF APPEALS OF IOWA No. 9-592 / 08-1718 Filed October 7, 2009 MARK TREMEL and BRUCE TREMEL, Minors, by CITIZENS FIRST NATIONAL BANK of Storm Lake, Iowa, Their Conservator, Petitioners-Appellants, vs. IOWA DEPARTMENT OF REVENUE, Respondent-Appellee. ________________________________________________________________ Appeal from the Iowa District Court for Harrison County, G.C. Abel, Judge.

Beneficiaries of a life insurance policy not included in the probate estate appeal the district court's ruling holding them responsible for the payment of the Iowa estate tax. REVERSED.

Steven J. Roy, Denise M. Mendt, and Bridget C. Shapansky of Nyemaster, Goode, West, Hansell & O'Brien, P.C., Des Moines, for appellants. Thomas J. Miller, Attorney General, and James D. Miller, Assistant Attorney General, for appellee.

Heard by Sackett, C.J., and Eisenhauer and Doyle, JJ.

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EISENHAUER, J. The Iowa Department of Revenue and the district court determined designated beneficiaries of a life insurance policy not included in the probate estate were responsible for the payment of the Iowa estate tax. We reverse. I. BACKGROUND FACTS and PROCEEDINGS. The facts are stipulated and undisputed. Philip Tremel died intestate in September 1998, leaving a surviving spouse, Lynne, and two minor children, Mark and Bruce. Lynne was appointed administrator of Philip's estate and

Citizens First National Bank of Storm Lake was appointed conservator for the boys. Lynne disclaimed her interest in the estate and Mark and Bruce became the sole beneficiaries of the estate. At the time of his death Philip owned a life insurance policy on his own life. Lynne filed a separate disclaimer as a

beneficiary under the policy and Mark and Bruce, as named contingent beneficiaries, became entitled to $516,130.15 in life insurance proceeds. The estate's filings showed $98,687.92 due for federal estate tax, no inheritance tax due, and $31,150.79 due for Iowa estate tax. After the payment of administrative expenses, the estate had no assets to pay the federal and Iowa estate taxes. The Iowa estate tax is equal to the federal credit for state death taxes. The estate was insolvent upon its closing. Mark and Bruce received no property from the estate. On May 6, 2004, the Iowa Department of Revenue (IDOR) assessed the Iowa estate tax against Mark and Bruce and attempted to collect the tax through a levy on the insurance funds Citizens Bank was holding as conservator.

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Citizen's Bank entered into an agreement with the IDOR reserving the right to request a refund and, after it received court approval to honor the levy, Citizen's Bank paid $50,153.05 to the IDOR for Iowa estate tax, interest and penalties. The next month, in June 2005, Citizen's Bank filed timely claims for a refund and the IDOR has no objection to the manner in which the refund claims were made. The IDOR denied the refund claims and Mark and Bruce sought administrative relief. The only property Mark and Bruce received was the life insurance proceeds. The parties agree these proceeds are not included in or taxable to the estate for inheritance tax purposes. Therefore, the life insurance proceeds are outside of the scope of the provisions of Iowa Code chapter 450, inheritance tax. See In re Estate of Brown, 205 N.W.2d 925, 926 (Iowa 1973) (proceeds of life insurance payable to a named beneficiary are exempt from Iowa inheritance tax). The parties also agree the insurance proceeds were included in the taxable estate for federal estate tax and Iowa estate tax purposes, but were not part of the probate estate or assets. In August 2006, the administrative law judge (ALJ) ruled that because the insurance proceeds were not part of the estate for inheritance tax purposes, the Iowa Code did not authorize the IDOR to collect the estate tax from Mark and Bruce. Subsequently, the ALJ found the IDOR's position was not substantially justified and awarded attorney's fees and costs to Mark and Bruce. The IDOR appealed the decision to its director. The IDOR director reversed the ALJ's

decision. The director ruled the IDOR was authorized to collect the estate tax

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from the insurance proceeds and reversed the award of attorney's fees and litigation costs. The district court affirmed the director's decision and this appeal followed. II. SCOPE OF REVIEW. In this appeal from an administrative agency, our review is for correction of errors at law. Camacho v. Iowa Dep't of Revenue, 666 N.W.2d 537, 540 (Iowa 2003). III. TAXATION. The resolution of this case involves the interplay of the inheritance tax provisions in Iowa Code chapter 450 and the estate tax provisions in Iowa Code chapter 451 (1997). Mark and Bruce argue the IDOR has no statutory authority to assess and collect the estate tax due from the life insurance proceeds. We strictly construe taxing statutes against the taxing body and liberally in favor of the taxpayer. Sorg v. Iowa Dep't of Revenue, 269 N.W.2d 129, 132 (Iowa1978). "It must appear from the language of the statute the tax assessed was clearly intended." Id. For the IDOR's assessment to be upheld there must be a statute creating a lien on property possessed by Mark or Bruce or a statue must impose the requirement to pay the tax on Mark or Bruce. We agree with appellants that there is neither. A. Personal Representative Obligations.

The filing of an estate tax return is addressed in Iowa Code section 451.5, which provides, "[t]he personal representative of a decedent whose estate may be subject to the [estate] tax . . . shall file . . . the estate tax return." The payment

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of Iowa estate taxes is addressed in Iowa Code section 451.6, which provides, "[t]he [estate] tax imposed by this chapter shall be paid by the personal representative."1 When, as here, the decedent dies intestate, the term "personal representative" means the administrator of the estate. See Iowa Code

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